Transaction processor for clearing interest rate swaps with improved efficiency

ABSTRACT

The disclosed embodiments relate to improving the efficiency of an electronic trading system for interest rate swaps (“IRS”) by allowing for IRS contracts to be funded in a base currency while the cash flows, e.g. coupon payments, price alignment interest, variation margin, are denominated in a local currency different from the base currency. Thereby cash flows may be netted and offset minimizing the magnitude of funds needed to be moved and reducing the number of transactions processed by the electronic trading system as well as the consumption of computational resources thereby. Furthermore, the disclosed embodiments facilitate entering into IRS transactions is a currency different from the currency of cash flows while eliminating Herstatt risk due to volatility of foreign exchange rates, which allows for increased off shore participation and thereby increased transaction volume.

REFERENCE TO RELATED APPLICATIONS

This application claims priority to and the benefit as a continuationunder 37 C.F.R. 1.53(b) of U.S. patent application Ser. No. 16/924,730,filed Jul. 9, 2020, now U.S. Pat. No. ______, which claims priority toand the benefit as a continuation under 37 C.F.R. 1.53(b) of U.S. patentapplication Ser. No. 16/160,360, filed Oct. 15, 2018, now U.S. Pat. No.10,748,212, which claims priority to and the benefit as a continuationunder 37 C.F.R. 1.53(b) of U.S. patent application Ser. No. 14/877,658,filed Oct. 7, 2015, now U.S. Pat. No. 10,140,659, which claims thebenefit of the filing date under 35 U.S.C. § 119(e) of U.S. ProvisionalApplication Ser. No. 62/079,690 filed Nov. 14, 2014, the entirety of allof which are hereby incorporated by reference and relied upon.

BACKGROUND

A financial instrument trading system, such as a futures exchange,referred to herein also as an “Exchange”, such as the Chicago MercantileExchange Inc. (CME), provides a contract market where financialinstruments, for example futures and options on futures, are traded.Futures is a term used to designate all contracts for the purchase orsale of financial instruments or physical commodities for futuredelivery or cash settlement on a commodity futures exchange. A futurescontract is a legally binding agreement to buy or sell a commodity at aspecified price at a predetermined future time. An option is the right,but not the obligation, to sell or buy the underlying instrument (inthis case, a futures contract) at a specified price within a specifiedtime. The commodity to be delivered in fulfillment of the contract, oralternatively the commodity for which the cash market price shalldetermine the final settlement price of the futures contract, is knownas the contract's underlying reference or “underlier.” The terms andconditions of each futures contract are standardized as to thespecification of the contract's underlying reference commodity, thequality of such commodity, quantity, delivery date, and means ofcontract settlement. Cash Settlement is a method of settling a futurescontract whereby the parties effect final settlement when the contractexpires by paying/receiving the loss/gain related to the contract incash, rather than by effecting physical sale and purchase of theunderlying reference commodity at a price determined by the futurescontract, price.

Typically, the Exchange provides for a centralized “clearing house”through which all trades made must be confirmed, matched, and settledeach day until offset or delivered. The clearing house is an adjunct tothe Exchange, and may be an operating division of the Exchange, which isresponsible for settling trading accounts, clearing trades, collectingand maintaining performance bond funds, regulating delivery, andreporting trading data. The essential role of the clearing house is tomitigate credit risk. Clearing is the procedure through which theClearing House becomes buyer to each seller of a futures contract, andseller to each buyer, also referred to as a novation, and assumesresponsibility for protecting buyers and sellers from financial loss dueto breach of contract, by assuring performance on each contract.Essentially, the transaction between the buyer and seller is bifurcatedinto two separate transactions, one between the buyer and the ClearingHouse and another transaction between the seller and the Clearing House.These transactions are not dependent on each other. That is, as theClearing House guarantees performance to either party, should the buyeror seller default or otherwise fail to perform their obligation undertheir transaction with the clearing house, the other party's transactionremains unaffected. The Clearing House protects itself from loss byrequiring each party to post a performance bond to cover the potentialrisk of loss of that party to the Clearing House. As any given party'srisk of loss may change over time, going up or down, the Clearing Housefurther periodically, e.g. daily, calculates adjustments to the risk ofloss and the performance bond, referred to as “variation margin”, andcredits or debits the party accordingly. A clearing member is a firmqualified to clear trades through the Clearing House for itself,referred to as production trades, or on behalf of their customers.

An interest rate swap is a well-known financial transaction typicallyoccurring between two parties. In a swap, the two parties agree to makepayments to each other; the payments of the first and second partiesdefine the type of swap. In a basis swap, the payments made by the firstand second parties are based on different floating interest rates in thesame currency. In a currency swap, the payments are made based on eitherfixed and/or floating interest rates in different currencies. In aninterest rate swap, the payments made by the parties are in the samecurrencies, but one of the payments is based on a fixed interest ratewhile the other payment is based on a floating interest rate. The twoparties to the interest rate swap are called counterparties.

One purpose of an interest rate swap is as a hedge from changinginterest rates; however, such hedge results in an added cost. In aninterest rate swap, while one party is often hedging against potentiallosses, the other party is often seeking financial gain based onspeculation that the added cost paid by the hedging party will begreater than the actual change in value due to the interest rate change.

The payments made between the parties in an interest rate swap are basedon interest rates; however, the interest rate is only one factor indetermining the amount of payment. Another factor is the amount ofprincipal which is periodically multiplied by the different interestrates to determine the payments made. In an interest rate swap, there isno exchange or payment of principal, so the principal is referred to asbeing a notional amount. This notional amount dictates the size of theinterest payments and is agreed on by the parties when negotiating theterms of the interest rate swap. The notional amount remains constantfor the duration of the swap.

For example, an exemplary interest rate swap could be between a firstdealer (for example, a typical bank which is relatively small in size)which desires to reduce the risk of interest rate fluctuation and asecond dealer (for example, a large financial institution) which iswilling to accept a risk in interest rate fluctuation in return forreceiving a higher fixed interest rate. The first dealer agrees to paythe second dealer interest payments that are based on a long term fixedrate. In exchange, the second dealer agrees to pay the first dealerinterest payments that are based on a short term floating rate. Thus,the first dealer and the second dealer are counterparties.

Typically, the floating interest rate is tied to the London InterbankOffered Rate (LIBOR), which is the rate of interest at which banks canborrow funds from other banks, in marketable size, in the LondonInterbank market and is set by the British Bankers' Association, PinnersHall, 105-108 Old Broad Street, London EC2N 1EX United Kingdom, a tradeassociation representing banks and other financial services firms thatoperate in the United Kingdom. If the first dealer and the second dealerenter into a swap over a longer-term period (for example five (5)years), the first dealer pays out interest to the second dealeraccording to the fixed rate over that period (e.g. five years at thefive-year fixed rate) and receives interest from the second dealeraccording to a floating shorter-term rate (for example, the three-monthLIBOR rate) over that same period. Conversely, the second dealerreceives interest payments from the first dealer according to the fixedlong-term rate and pays interest payments to the first dealer based onthe floating short-term rate. Both the fixed long-term rate and theLIBOR rate are applied to a common notional principal. Alternatively,both series of cash flows could be based on different floating interestrates, that is, variable interest rates that are based upon differentunderlying indices. This type of interest rate swap is known as a basisor a money market swap.

Before entering into an interest rate swap contract, the first dealerand the second dealer may try to value the price of the interest rateswap. The value of an interest rate swap is the difference between thenet present value of the two future income streams that are swapped bythe first dealer and the second dealer. Because the floating interestrate varies in the future, the size of each future cash flow based onthe floating interest rate is not known to either the first dealer orthe second dealer. To solve this problem, the swap market uses forwardimplied interest rates to estimate the net present value of the fixedand floating interest rates. The forward interest rates may be derivedfrom convexity adjusted Eurodollar Futures rates for example, orbenchmark swap rates promulgated by the International Swap DealersAssociation (ISDA) 360 Madison Avenue, 16th Floor, New York, N.Y. 10017USA, a global trade association representing participants in theprivately negotiated derivatives industry. The ISDA also provides alegal master documentation for interest rate swap transactions(available at http://www.isda.org/cl.html). ISDA agreements areessential for each new counterparty, and amendments to agreements arerequired for each new deal with a particular counterparty.

Thus, an interest rate swap is effectively a construction of two cashflow streams with the same maturity. In a “vanilla” fixed for floatinginterest rate swap one of the cash flow streams is comparable to that ofa bond (fixed interest rate payments) and the other cash flow stream iscomparable to a periodically revolving borrowing/lending facility orfloating rate note (floating interest rate payments). Mathematicalanalysis shows that the net present value of an interest rate swap hasinterest rate sensitivity similar to the price of a bond having asimilar coupon, maturity, and credit rating.

The similarities between in the interest rate sensitivities of “vanilla”interest rate swaps and bonds explains the heavy use of government bondfutures, government bond repos, and the cash market to manage interestrate risk resulting out of interest rate swap transactions; thispractice, however, also involves disadvantages. Initially, both marketsegments are based on different credits and therefore an unexpectedchange in the yield differential of the two markets could result inheavy losses. In addition, conventional techniques require efficientaccess to the bond and repo market. Specifically, repo transactions canbe problematic since these transactions have to be renegotiated on aregular basis and market conditions can be volatile.

An interest rate swap (“IRS”) is a contractual agreement between twoparties, i.e., the counterparties, also referred to as the payer andreceiver, where one stream of future interest payments is exchanged foranother, e.g., a stream of fixed interest rate payments in exchange fora stream of floating interest rate payments, based on a specifiedprincipal amount or an assumed notional amount. An IRS may be used tolimit or manage exposure to fluctuations in interest rates. One commonform of IRS exchanges a stream of floating interest rate payments on thebasis of the 3-month London interbank offered rate (“LIBOR”) for astream of fixed-rate payments on the basis of the swap's fixed interestrate. Another common form of IRS, known as an overnight index swap,exchanges, at its termination, a floating rate payment determined bydaily compounding of a sequence of floating interest rates on the basisof an overnight interest rate reference (e.g., the US daily effectivefederal funds rate, or the European Overnight Index Average (EONIA))over the life of the swap, for a fixed rate payment on the basis ofdaily compounding of the overnight index swap's fixed interest rate overthe life of the swap.

The components of a typical IRS may be defined in a swap confirmationwhich is a document that is used to contractually outline the agreementbetween the two parties. The components defined in this agreement mayinclude:

-   -   Notional—The fixed and floating coupons are paid out based on        what is known as the notional principal or just notional. If one        were hedging a loan with $1 million principal with a swap, then        the swap would have a notional of $1 million as well. Generally        the notional is never exchanged and is only used for calculating        cash flow amounts;    -   Fixed Rate—This is the rate that will be used to calculate        payments made by the fixed payer. This stream of payments is        known as the fixed leg of the swap;    -   Coupon Frequency—This is how often coupons would be exchanged        between the two parties, common frequencies are annual,        semi-annual, quarterly and monthly though others are used such        as based on future expiry dates or every 28 days. In a vanilla        swap the floating and fixed coupons would have the same        frequency but it is possible for the streams to have different        frequencies;    -   Business Day Convention—This defines how coupon dates are        adjusted for weekends and holidays. Typical conventions are        Following Business Day and Modified Following;    -   Floating Index—This defines which index is used for setting the        floating coupons. One common index is LIBOR. The term of the        index will often match the frequency of the coupons. For        example, 3 month LIBOR would be paid Quarterly while 6 month        LIBOR would be paid Semi-Annually;    -   Daycount conventions—These are used for calculating the portions        of the year when calculating coupon amounts;    -   Effective Date—This is the start date of a swap and when        interest will start accruing on the first coupon; and    -   Maturity Date—The date of the last coupon and when the        obligations between the two parties end.

Currently, most IRS's are entered into on a bilateral,principal-to-principal basis, i.e. outside of an exchange (referred toas “over the counter” or “OTC”) with each ultimate counterparty beingthe entity with whom the other party executed the trade. As opposed totrades, such as trades in futures contracts, which are cleared via aclearing house, as described above, OTC derivatives may be bookedbilaterally between the counterparties, as opposed to clearedderivatives which are booked with a clearing house. OTC bilateralderivatives counterparties, such as those involved in a IRS agreement,therefore assume credit exposure, known as counterparty credit risk, toeach other while cleared derivatives counterparties are exposed tocredit risk of the clearing house. Second, cleared derivatives alwaysinvolve the posting of margin to the clearing house by the parties to atrade, while margining by OTC bilateral derivatives counterparties issubject to negotiation by the parties. Finally, the terms of OTCbilateral derivatives can be customized to fit the needs of thecontracting parties. The terms of cleared derivatives, in contrast,typically involve a high degree of standardization to facilitate thecomputation of required margin amounts.

Within the interest rate swap market, bilateral netting agreementsfacilitate netting of positions between specific counterparties byreducing credit exposure and freeing up capital; however, it isdifficult, if not impossible, for participants to freely net dealsacross multiple counterparties. Further, it is time consuming andcumbersome to settle each agreement separately, and there is noguarantee that the cancellation or assignment of a particular contractprovides the best price.

Central clearing is designed to standardize certain swaps, promotetransparency, and allow market participants to mitigate theircounterparty credit risk to dealers. Accordingly, it is advantageous tocentrally clear OTC IRS's.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts an illustrative computer network system that may be usedto implement aspects of the disclosed embodiments.

FIG. 2 depicts a block diagram of an exemplary implementation of thesystem of FIG. 1 for minimizing transactions relating to IRS positions.

FIG. 3 depicts a flow chart showing operation of the system of FIGS. 1and 2.

FIG. 4 shows an illustrative embodiment of a general computer system foruse with the system of FIGS. 1 and 2.

FIG. 5 shows an exemplary process for determining price aligned interestaccording to the disclosed embodiments.

DETAILED DESCRIPTION

The disclosed embodiments relate to improving the efficiency of anelectronic trading system for interest rate swaps (“IRS”) by allowingfor IRS contracts to be funded in a base currency while the cash flows,e.g. coupon payments, price alignment interest, variation margin, aredenominated in a local currency different from the base currency.Thereby cash flows may be netted and offset minimizing the magnitude offunds needed to be moved and reducing the number of transactionsprocessed by the electronic trading system to effect those cash flows aswell as the consumption of computational resources thereby. Furthermore,the disclosed embodiments facilitate entering into IRS transactions is acurrency different from the currency of cash flows while eliminatingHerstatt risk due to volatility of foreign exchange rates, which allowsfor increased off shore participation and thereby increased transactionvolume.

As discussed above, an IRS generally consists of a contractual agreementbetween two parties, i.e., the counterparties, also referred to as thepayer and receiver, where one stream or series of future interestpayments is exchanged for another, e.g., a stream/series of fixedinterest rate payments in exchange for a stream/series of floatinginterest rate payments, based on a specified principal amount or anassumed notional amount. The payments are referred to as “coupons.” In aplain IRS contract, as opposed to a cross-currency swap, both series ofpayments occur in a single currency, e.g. dollars, Euros, etc., which isspecified by the IRS contract, and generally, the party making aparticular payment funds that payment in the requisite currency.However, in certain situations, as will be described in more detailbelow, a party may desire to fund their payment in a different currencythen required by the IRS contract and will therefore need to converttheir funding to the requisite currency in order to make the payment andsatisfy their obligation under the IRS agreement, e.g. they will have tobuy, using their base currency, the requisite amount of the localcurrency that they need per the contract. Similarly, a party may desireto receive a payment owed in a currency different from the currencyspecified in the IRS contract and will therefore need to convert thereceived payment to their desired currency upon receipt, e.g. sell thelocal currency in exchange for their base currency. As the process ofpaying and receiving a coupon payment, as well as the conversion betweencurrencies, is not instantaneous, changes in the rate of exchangebetween currencies presents a risk to either party until the transactionis completed. This is referred to as Herstatt risk. Herstatt risk, alsoknown as cross-currency settlement risk or foreign exchange risk is therisk that a party to a trade fails to make payment even though it hasbeen paid by its counterparty.

As was discussed above, it is desirable to clear OTC IRS contracts inorder to standardize certain swaps, promote transparency, and allowmarket participants to mitigate their counterparty credit risk todealers. Clearing introduces additional complexities related to themitigation of risk. In particular, in order to protect the clearingorganization/central counter party (“CCP”), the CCP will require eachparty to an IRS to post a performance bond to cover their risk of loss.As the value of each party's position in an IRS may vary day to day asinterest rates change, the CCP will adjust the amount of the performancebond as the risk of loss changes, requiring that one party postadditional funds or receive a credit of funds previously posted. This isreferred to as variation margin. Both the initial performance bond andthe variation margin are based on the present value of the IRS. To valuean IRS, the total value of all remaining fixed and floating couponpayments is determined and then discounted to create a net present valueof that total amount. To assess the value of the remaining floatingpayments, a forecast curve is used which predicts, estimates or impliesthe value of the floating interest rate at each of the future paymentdates. To determine the net present value of the fixed and floatingpayments, a discount curve is used which predicts, estimates, or impliesprevailing future interest rates.

Once computed, the performance bond and subsequent variation margin iscredited to, or collected from, each of the party and counter party tothe IRS. While these funds are collected/paid with respect to the CCP,generally one party to the IRS benefits at the expense of the otherparty as the value of the IRS varies. To compensate for the burden ofposting margin, the CCP may implement Price Alignment Interest. PriceAlignment Interest (“PAI”) is the overnight cost of funding collateral.It is debited from the receiver and transferred to the payer to coverthe loss of interest on posted collateral, i.e. variation margin. Asdescribed above, as the value of the floating leg of an IRS varies overthe life of the IRS, the net present value (“NPV”) will change resultingin variation margin (“VM”) being credited to one party andrequired/collected from the other party. PAI transfers the benefit ofreceiving VM back to the payer of the VM. PAI then is the overnight costof funding the VM, debited from the receiver and transferred to thepayer. PAI is generally not required for futures contracts, i.e. for aFutures trade, generally because the rules of a CCP typically definethat each day the closing price of the contract is used to calculate VM,and the profit or loss is debited from the party's margin account daily.The exchange/CCP may regard this payment as full and final settlement ofthe contract, as should the counterparty default, the party will receiveno further payment on this contract. This means a Futures trade isregarded as “final” or “matured” on each and every day, until the expirydate of the contract, in which case the VM payment is a settled amount,and not a margin asset. Accordingly, in this case, the receiver of VMare free to re-use any VM payment, as in the example above, without thePAI adjustment.

For an OTC IRS trade, the VM payment represents the value of future cashflows, which remain unsettled until each coupon date, and finalmaturity, so one may regard VM as an amount of margin which they wouldreceive back should the value of the contract move in their favor. Thedifference in default, is that in some CCPs for OTC products, theportfolio of trades owned by the defaulting party (for direct members)are auctioned, such that eventually a new party takes ownership, and thecontract continues unchanged until maturity. This means the VM paymentfor an OTC IRS trade is characterized as a margin asset, which one wouldexpect not to lose should their counterparty default, hence theapplication of PAI, equivalent to receiving interest on this marginasset, is applied.

Should PAI be ignored by a CCP, the payer of VM would feel the penaltyof clearing, which they wouldn't outside a CCP. PAI evens this out tosome degree.

Accordingly, during the life of a cleared OTC IRS, there are severaltypes of cash flows which occur, the coupon payments, the variationmargin and the PAI. When computing variation margin and PAI, accuratecomputation of the net present value of the IRS's remaining couponpayments is important. Where the parties will fund these coupon paymentsin the same currency as required under the IRS, the valuationcalculation merely requires appropriate forecasting and discountingcurves for the appropriate interest rates in the home country of thecurrency. However, where the parties are funding their payments in adifferent currency then required under the IRS contract, the exchangerate between their desired currency and the requisite currency canaffect the valuation of the IRS contract. Parties may wish to fund anIRS contract in a different currency, referred to as the “base”currency, then the currency required under the contract, referred to asthe “local” currency, when, for example, the market for such IRScontracts is greater outside of the home country of the local currency.The currencies for which IRS contracts most heavily trade are referredto as the G17 currencies (as there are 17 currencies on this list) andincludes dollars, Euros, Yen, Canadian Dollars, etc. Non-G17 currenciesinclude, for example, Mexican Pesos.

Furthermore, in cleared OTC IRS trades, it is desirable that all of thecash flows, e.g. coupon payments, VM and PAI, occur in the samecurrency. This permits these cash flows to be netted or otherwise offsetagainst each other which may reduce the magnitude, as well as simplifythe computation, of the value to be moved among the parties the CCP,reduces the number of transactions to effect the cash flows where aparticular cash flow is completely offset (effectively eliminating theneed for the transaction), and lowers Herstatt risk as the CCP need notenter into any currency exchange transactions when facilitating the cashflows among the parties and the CCP. Reduction in transactions to effectthe cash flows is particularly advantageous as it may correlate to areduction in the consumption of computational resources and processingcapacity allowing for increased transaction volume handling.

In order to clear OTC IRS trades which are funded in a base currencydifferent from the local currency in which the cash flows occur,accurately valuing the IRS for calculation of VM, PAI, etc. requiresaccounting for the differences between the base and local currencies,while maintaining the resultant valuation denominated in the localcurrency such that the cash flows are all in the same currency.

As was discussed above, in order to value an IRS, the present value ofcash flows of each leg of the transaction must be determined. In an IRS,the fixed leg is fairly straightforward since the cash flows arespecified by the coupon rate set at the time of the agreement. Pricingthe floating leg is more complex since, by definition, the cash flowschange with future changes in the interest rates. The projected floatingpayments are based on the estimated yield curve of a market index rate,e.g. LIBOR, US Fed Funds, as of the measurement date, which is derivedby bootstrapping the index's spot yield curve. Bootstrapping is a methodutilized to construct a fixed-income yield curve using forwardsubstitution whereby quoted periodic spot rates are used to estimatefuture spot rates based on a “no arbitrage” principal. The projectedfuture cash flows are then discounted to a present value using adiscount curve, i.e. discount factors for different maturities.Accordingly, two curves are necessary for valuing an IRS, a forecastcurve, which accounts for future changes in the interest rate, used tovalue the cash flows of the floating leg and a discount curve used tocalculate the net present values of the cash flows of the fixed andfloating legs, the sum of which is the current value of the IRS. ForIRS's denominated in one of the G17 currencies, such forecast anddiscount curves are well known and are based on well-known indices forthose currencies, e.g. LIBOR for Euros, US Fed Funds rate for dollars.

However, using these curves works well only when the IRS to be valued isfunded in the same currency as the cash flows being exchanged. In otherwords, when an IRS having cash flows denominated in a local currency,e.g. Pesos, is funded in another base currency, e.g. dollars, usingstandard forecasting and discount curves based on local currency indicesdoes not account for volatility in exchange rates between the localcurrency and the base currency. That is, a trader wishing to transact inlocal currency IRS's will first need to convert their funding from thebase currency to the local currency prior to entering into such atransaction. Similarly, as they pay or collect payments according to theIRS terms, they will need to convert those payments between the localand base currency. In each situation, the trader (or their counterparty) is exposed to risk due to volatility in exchange rates, referredto as Herstatt risk. As such contracts are typically entered into whenthere is a larger off-shore market for the IRS in the local currencythan in the local/on-shore market, traders desire to transact in theirhome/base currency rather than in the local currency. To minimize riskdue to exchange rate volatility, the disclosed embodiments utilizeforecasting and discount curves which account for this volatility. Thisallows a party to an IRS to value the IRS in the local currency whileaccounting for the base currency. Such curves may essentially factor theexchange rates between the base and local currencies predicted to beprevailing at the time of each coupon payment. For example, a standardforecast curve based on the floating rate index and a standard discountcurve based on the local currency institutional interest rates may bemodified based on forecasted exchange rates derived from the foreignexchange market and/or cross-currency swap agreements for the local/basecurrencies taken from the swaps markets to provide discount and forecastcurve values for the different tenors of the IRS contract.

In building these forecast and discount curves, for example, threeinstruments may be used as inputs, a “vanilla” IRS funded anddenominated in the local currency, a local/base currency exchangeforward contract and a local/base cross currency swap contract. Forexample, the vanilla IRS funded and denominated in the local currencymay include the MXN TIIE Swap. The MXN TIIE Swap is a vanilla interestswap, the payment frequency is “28-day” month and the floating indexreferred to is the 28-day TIIE rate, which is the main interbankreference rate and calculated on a daily basis. TIIE Swaps serve ascurve inputs for both discount and forecast curves. The local/basecurrency exchange forward contract may include the USD/MXN FC Forwardcontract wherein the FX Forward outright rate is calculated as theinterest rate differential between Mexican Peso and US Dollar, using theinterest rate parity. The local/base cross currency swap contract mayinclude the USD/MXN Cross Currency Swap wherein the THE-Libor crosscurrency swap involves an exchange of floating rates in USD Libor 1M andMXN TIIE 28 Day. The quotation represents the basis points that are usedas spread over Libor as equivalent to THE. In constructing the discountcurve, such as for Mexican Pesos, from 0 up to 1 year, FX forward isused for the calculation of MXN discount curve. To cover longer tenor,TIIE-USD Libor 1M cross currency swap is employed, since liquidity of FXforward drops beyond 1Y. There are two curves taken as prerequisite forthe MXN discount curve, which is USD Fed Funds Curve and USD Libor 1Mcurve. Those two curves are taken as foreign discount and forecast curverespectively. The forecast curve for Pesos may then be derived from thediscount curve.

The disclosed embodiments may be used for implementing cleared IRS'sfunded in a base currency but with cash flows denominated in localcurrencies, e.g. where those IRS contracts are not widely traded in thelocal market, i.e. the country of the local currency, but instead aremore widely traded in off-shore markets, i.e. the country of the basecurrency. It will be appreciated then that the disclosed embodiments maybe utilized where the local and base currencies are any two differentcurrencies, including those currencies which are used in more widelytraded IRS contracts, e.g. typically those in the top 17 currencies,commonly referred to as the “G17”, where there are substantial markets.However, in the typical case, the disclosed embodiments will be morelikely used when the local currency is a lesser trader currency, e.g. anon-G17, currency. As such, the disclosed embodiments will be describedwith respect to exemplary IRS contracts denominated in Mexican Pesos(“MXN”) but funded, or otherwise valued/collateralized in U.S. dollars(“USD”). While a bilateral MXN (non-cleared) IRS exists, a Cleared MXNIRS product does not exist in the marketplace that takes into accountthe off shore funding impact, the clearing process and cash flowmovements into valuation. However, it will be appreciated that thedisclosed embodiments are applicable to any cleared IRS denominated in adeliverable local currency, i.e. the cash flows (coupon payments,variation margin and PAI) occur in the local currency, but funded orotherwise collateralized/valued in a base currency different from thelocal currency, and in particular where the local currency is considereda non-G17 currency and the base currency is a G17 currency.

Specifically, the disclosed embodiments address the situation where thefunding (collateral) for the swap instrument is in a different currencythan the cash flows such as variation margin, coupon payments, and PAI.For example, the USD-MXN swap is funded in USD, but the cash flows arein MXN Peso. This example and the examples below use the USD-MXN Pesoswap as an illustration, but the new method can be used for anydeliverable currency outside of the G17 currencies.

As described above, it is not desirable to require market participantsto fund such a cleared swap at an “offshore” (U.S.-based) clearing housewith the “local” (in this case, MXN Peso) currency. It is alsoproblematic to administer daily cash flows in the offshore currencybecause the PAI of the offshore currency will be subject to differentovernight rates.

The disclosed embodiments provide a new mechanism for pricing clearedcurrency swaps which takes into account a conversion between USD and MXNPeso while still funding the instrument in USD and administering thedaily cash flows in MXN Peso. In one embodiment, this mechanism employsthe following steps:

-   -   1. MXN Swaps are priced using a USD funding. The MXN discount        curve will take into account USD Overnight Index Swap rate        (“OIS”) and USD MXN basis and used to determine a MXN Net        Present Value (“NPV”).    -   2. For the MXN Peso, moving coupon payments are a contractual        obligation, so all cash flows such as variation margin, coupon        payments, and PAI will move in MXN Pesos.    -   3. USD funding is used for pricing, so the mechanism relies on a        “fed fund” rate to compute the equivalent PAI amount using the        following steps:        -   a. Cumulative variation margin (“VM”) is determined in            Pesos;        -   b. The method converts the VM to USD using the relevant            foreign exchange (“FX”) rate (FX0);        -   c. Using the USD VM number from (b) and the Fed Funds rate,            the PAI amount is computed in USD; and        -   d. The USD VM and PAI amount are both converted back to            Pesos using the relevant FX rate (FX1)

Note that the FX rate mentioned in steps 3b and 3d will be slightlydifferent. FX0 is the cash FX rate at time T and FX1 is the FX rate fortime T+1. FX0 is the FX overnight rate and FX1 is tomorrow's rate. Theseare the first two points used to construct the USDMXN cross-currencybasis curve.

The steps above can also be accomplished by creating a MXN PAI ratewhich will be the Fed Funds rate adjusted by the FX0/FX1 rates asfollows:

${{MXN}{PAI}{Rate}} = {{{FedFund} \cdot \frac{{FX}_{1}}{{FX}_{0}}} + \frac{\frac{{FX}_{1}}{{FX}_{0}} - 1}{\frac{n}{260}}}$

Once the MXN PAI Rate is determined, it will plug into the normal PAIformula calculation as follows:

${{MXN}{PAI}{Amount}} = \frac{\begin{matrix}{{- {MXN}}{Adjusted}{NPV}\left( {{Previous}{Day}} \right) \times} \\{{MXN}{PAI}{Rate} \times \#{of}{days}{from}{today}} \\{{to}{the}{next}{business}{day}{in}{MXMC}{calendar}}\end{matrix}}{360}$

Overnight indexed swaps are interest rate swaps in which a fixed rate ofinterest is exchanged for a floating rate that is the geometric mean ofa daily overnight rate. The calculation of the payment on the floatingside is designed to replicate the aggregate interest that would beearned from rolling over a sequence daily loans at the overnight rate.In U.S. dollars, the overnight rate used is the effective federal fundsrate (the federal funds rate is “the interest rate” at which depositoryinstitutions actively trade balances held at the Federal Reserve, calledfederal funds, with each other, usually overnight, on anuncollateralized basis. Institutions with surplus balances in theiraccounts lend those balances to institutions in need of larger balances.The interest rate that the borrowing bank pays to the lending bank toborrow the funds overnight is negotiated between the two banks, and theweighted average of this rate across all such transactions is thefederal funds effective rate.). The “risk-free” term structure ofinterest rates is a key input to the pricing of derivatives. It is usedfor defining the expected growth rates of asset prices in a risk-neutralworld and for determining the discount rate for expected payoffs in thisworld. Many banks now consider that overnight indexed swap (OIS) ratesshould be used as the risk-free rate when collateralized portfolios arevalued.

While the disclosed embodiments may be discussed in relation to IRScontracts, it will be appreciated that the disclosed embodiments may beapplicable to other bilateral contracts, equity, options or futurestrading system or market now available or later developed.

It will be appreciated that the plurality of entities utilizing thedisclosed embodiments, e.g. the market participants, may be referred toby other nomenclature reflecting the role that the particular entity isperforming with respect to the disclosed embodiments and that a givenentity may perform more than one role depending upon the implementationand the nature of the particular transaction being undertaken, as wellas the entity's contractual and/or legal relationship with anothermarket participant and/or the exchange. An exemplary trading networkenvironment for implementing trading systems and methods is shown inFIG. 1. An exchange computer system 100 receives orders and transmitsmarket data related to orders and trades to users, such as via wide areanetwork 126 and/or local area network 124 and computer devices 114, 116,118, 120 and 122, as will be described below, coupled with the exchangecomputer system 100.

Herein, the phrase “coupled with” is defined to mean directly connectedto or indirectly connected through one or more intermediate components.Such intermediate components may include both hardware and softwarebased components. Further, to clarify the use in the pending claims andto hereby provide notice to the public, the phrases “at least one of<A>, <B>, . . . and <N>” or “at least one of <A>, <B>, . . . <N>, orcombinations thereof” are defined by the Applicant in the broadestsense, superseding any other implied definitions herebefore orhereinafter unless expressly asserted by the Applicant to the contrary,to mean one or more elements selected from the group comprising A, B, .. . and N, that is to say, any combination of one or more of theelements A, B, . . . or N including any one element alone or incombination with one or more of the other elements which may alsoinclude, in combination, additional elements not listed.

The exchange computer system 100 may be implemented with one or moremainframe, desktop or other computers, such as the computer 400described below with respect to FIG. 4. A user database 102 may beprovided which includes information identifying traders and other usersof exchange computer system 100, such as account numbers or identifiers,user names and passwords. An account data module 104 may be providedwhich may process account information that may be used during trades. Amatch engine module 106 may be included to match bid and offer pricesand may be implemented with software that executes one or morealgorithms for matching bids and offers. A trade database 108 may beincluded to store information identifying trades and descriptions oftrades. In particular, a trade database may store informationidentifying the time that a trade took place and the contract price. Anorder book module 110 may be included to compute or otherwise determinecurrent bid and offer prices. A market data module 112 may be includedto collect market data and prepare the data for transmission to users. Arisk management module 134 may be included to compute and determine auser's risk utilization in relation to the user's defined riskthresholds. An order processing module 136 may be included to decomposedelta based and bulk order types for processing by the order book module110 and/or match engine module 106. A volume control module 140 may beincluded to, among other things, control the rate of acceptance of massquote messages.

The trading network environment shown in FIG. 1 includes exemplarycomputer devices 114, 116, 118, 120 and 122 which depict differentexemplary methods or media by which a computer device may be coupledwith the exchange computer system 100 or by which a user maycommunicate, e.g. send and receive, trade or other informationtherewith. It will be appreciated that the types of computer devicesdeployed by traders and the methods and media by which they communicatewith the exchange computer system 100 is implementation dependent andmay vary and that not all of the depicted computer devices and/ormeans/media of communication may be used and that other computer devicesand/or means/media of communications, now available or later developedmay be used. Each computer device, which may comprise a computer 400described in more detail below with respect to FIG. 4, may include acentral processor that controls the overall operation of the computerand a system bus that connects the central processor to one or moreconventional components, such as a network card or modem. Each computerdevice may also include a variety of interface units and drives forreading and writing data or files and communicating with other computerdevices and with the exchange computer system 100. Depending on the typeof computer device, a user can interact with the computer with akeyboard, pointing device, microphone, pen device or other input devicenow available or later developed.

An exemplary computer device 114 is shown directly connected to exchangecomputer system 100, such as via a T1 line, a common local area network(LAN) or other wired and/or wireless medium for connecting computerdevices, such as the network 420 shown in FIG. 4 and described belowwith respect thereto. The exemplary computer device 114 is further shownconnected to a radio 132. The user of radio 132, which may include acellular telephone, smart phone, or other wireless proprietary and/ornon-proprietary device, may be a trader or exchange employee. The radiouser may transmit orders or other information to the exemplary computerdevice 114 or a user thereof. The user of the exemplary computer device114, or the exemplary computer device 114 alone and/or autonomously, maythen transmit the trade or other information to the exchange computersystem 100.

Exemplary computer devices 116 and 118 are coupled with a local areanetwork (“LAN”) 124 which may be configured in one or more of thewell-known LAN topologies, e.g. star, daisy chain, etc., and may use avariety of different protocols, such as Ethernet, TCP/IP, etc. Theexemplary computer devices 116 and 118 may communicate with each otherand with other computer and other devices which are coupled with the LAN124. Computer and other devices may be coupled with the LAN 124 viatwisted pair wires, coaxial cable, fiber optics or other wired orwireless media. As shown in FIG. 1, an exemplary wireless personaldigital assistant device (“PDA”) 122, such as a mobile telephone, tabletbased compute device, or other wireless device, may communicate with theLAN 124 and/or the Internet 126 via radio waves, such as via WiFi,Bluetooth and/or a cellular telephone based data communicationsprotocol. PDA 122 may also communicate with exchange computer system 100via a conventional wireless hub 128.

FIG. 1 also shows the LAN 124 coupled with a wide area network (“WAN”)126 which may be comprised of one or more public or private wired orwireless networks. In one embodiment, the WAN 126 includes the Internet126. The LAN 124 may include a router to connect LAN 124 to the Internet126. Exemplary computer device 120 is shown coupled directly to theInternet 126, such as via a modem, DSL line, satellite dish or any otherdevice for connecting a computer device to the Internet 126 via aservice provider therefore as is known. LAN 124 and/or WAN 126 may bethe same as the network 420 shown in FIG. 4 and described below withrespect thereto.

As was described above, the users of the exchange computer system 100may include one or more market makers 130 which may maintain a market byproviding constant bid and offer prices for a derivative or security tothe exchange computer system 100, such as via one of the exemplarycomputer devices depicted. The exchange computer system 100 may alsoexchange information with other trade engines, such as trade engine 138.One skilled in the art will appreciate that numerous additionalcomputers and systems may be coupled to exchange computer system 100.Such computers and systems may include clearing, regulatory and feesystems.

The operations of computer devices and systems shown in FIG. 1 may becontrolled by computer-executable instructions stored on anon-transitory computer-readable medium. For example, the exemplarycomputer device 116 may include computer-executable instructions forreceiving order information from a user and transmitting that orderinformation to exchange computer system 100. In another example, theexemplary computer device 118 may include computer-executableinstructions for receiving market data from exchange computer system 100and displaying that information to a user.

Of course, numerous additional servers, computers, handheld devices,personal digital assistants, telephones and other devices may also beconnected to exchange computer system 100. Moreover, one skilled in theart will appreciate that the topology shown in FIG. 1 is merely anexample and that the components shown in FIG. 1 may include othercomponents not shown and be connected by numerous alternativetopologies.

As shown in FIG. 1, the Exchange computer system 100 further includes arisk management module 134 which may implement the disclosed mechanismsas will be described with reference to FIG. 2. It will be appreciatedthe disclosed embodiments may be implemented as a separate module or aseparate computer system coupled with the Exchange computer system 100so as to have access to the requisite portfolio data. As describedabove, the disclosed embodiments may be implemented as a centrallyaccessible system or as a distributed system where some of the disclosedfunctions are performed by the computer systems of the marketparticipants.

FIG. 2 depicts a block diagram of a risk management module 134 accordingto one embodiment, which in an exemplary implementation, is implementedas part of the exchange computer system 100 described above. As usedherein, an exchange 100 includes a place or system that receives and/orexecutes orders.

In particular, FIG. 2 depicts a block diagram of a system 200, which mayalso be referred to as an architecture, for minimizing transactionsundertaken by an electronic trading system 100 of a central counterparty with respect to an interest rate swap (“IRS”) position, e gminimizing the transactions associates with effecting the cash flowsthereof, the IRS position comprising one of a first obligation to, basedon a notional amount denominated in a local currency, make each of afirst series of periodic payments in the local currency based on a fixedinterest rate and receive each of a second series of periodic paymentsin the local currency based on a floating interest rate and a secondobligation to make each of the second series of periodic payments andreceive each of the first series of periodic payments, wherein each ofthe first and second series of periodic payments is funded prior theretoin a base currency different from the local currency. In one embodiment,the system 200 includes a transaction processor 210, which may beimplemented as a separate component or as one or more logic components,such as on an FPGA which may include a memory or reconfigurablecomponent to store logic and processing component to execute the storedlogic, or as third logic 210, e.g. computer program logic, stored in amemory 204, or other non-transitory computer readable medium, andexecutable by a processor 202, such as the processor 402 and memory 404described below with respect to FIG. 4, to cause the processor 202 to,or otherwise be operative to, receive, from at least a first marketparticipant, e.g. trader, an IRS transaction between the first marketparticipant and a second market participant comprising the first andsecond obligations, and novate the IRS transaction, i.e. convert thefirst obligation into a third obligation to make each of the firstseries of periodic payments to an intermediary and receive each of thesecond series of periodic payments from the intermediary, and convertthe second obligation into a fourth obligation to make each of thesecond series of periodic payments to the intermediary and receive eachof the first series of periodic payments from the intermediary, whereinperformance of either of the third or fourth obligations is notdependent upon performance of the other of the third or fourthobligations. That is, the central counter party of the electronictrading system 100 becomes the counter party to each side of thetransaction and guarantees performance, etc. Each participant therebythen holds a position in the IRS contract comprising either theobligation to, based on a notional amount denominated in a localcurrency, make each of a first series of periodic payments in the localcurrency based on a fixed interest rate and receive each of a secondseries of periodic payments in the local currency based on a floatinginterest rate or the obligation to make each of the second series ofperiodic payments and receive each of the first series of periodicpayments, wherein each of the first and second series of periodicpayments is funded prior thereto in a base currency different from thelocal currency. As described herein, the computed variation marginamount is used to facilitate performance of either of the third orfourth obligations when performance of the other of the third or fourthobligations does not occur. The transaction processor 210 may be coupledwith the match engine module 106 to receive matched IRS transactions fornovation or such transactions may be receive via other mechanisms, suchas via external matched transaction feeds (not shown). The transactionprocessor 210 may be further coupled with the user databases 102 andAccount data module 104 in which each party's portfolio of positions isstored and wherein the valuation and margin processors 206 208,described below, access position data to perform the valuation andmargining processes described herein.

The system 200 includes an valuation processor 206, which may beimplemented as a separate component or as one or more logic components,such as on an FPGA which may include a memory or reconfigurablecomponent to store logic and processing component to execute the storedlogic, or as first logic 206, e.g. computer program logic, stored in amemory 204, or other non-transitory computer readable medium, andexecutable by a processor 202, such as the processor 402 and memory 404described below with respect to FIG. 4, to cause the processor 202 to,or otherwise be operative to, compute a value, denominated in the localcurrency, of the IRS position as a function of a remainder of the firstand second series of periodic payments being funded in the basecurrency.

The system 200 further includes a margin processor 208 coupled with thevaluation processor 206, which may be implemented as a separatecomponent or as one or more logic components, such as on an FPGA whichmay include a memory or reconfigurable component to store logic andprocessing component to execute the stored logic, or as second logic208, e.g. computer program logic, stored in a memory 204, or othernon-transitory computer readable medium, and executable by a processor202, such as the processor 402 and memory 404 described below withrespect to FIG. 4, to cause the processor 202 to, or otherwise beoperative to, compute a variation margin amount based on a differencebetween the computed value and a previously computed value of the IRSposition, the variation margin amount being denominated in the localcurrency; and wherein the margin processor 208 may be further operativeto one of credit to, or collect from a participant holding the IRSposition the computed variation margin amount.

In one embodiment, the local currency is pesos and the base currency isdollars. In one embodiment, the floating interest rate is based on areference interest rate comprising one of a Fed Funds rate, a LondonInterbank Offered Rate (“LIBOR”) or a Interbank Equilibrium InterestRate (“TIIE”) rate.

In one embodiment, the value of the IRS position and the variationmargin amount may be computed and credited/collected periodically, e.g.daily.

In one embodiment, the value of the IRS position comprises a net presentvalue of the IRS position.

In one embodiment, the valuation processor may be further operative todetermine a first discounted value of a remainder of the first series ofpayments based on the fixed interest rate and an exchange rate betweenthe local currency and the base currency expected to prevail when eachof the remainder of the first series of payments is to be made, anddetermine a second discounted value of a remainder of the second seriesof payments based on a value of the floating interest rate and theexchange rate between the local currency and the base currency expectedto prevail when each of the remainder of the second series of paymentsis to be made.

In one embodiment, the computing of the value of the IRS position may befurther based on one or more of an IRS instrument comprising anobligation to, based on a notional amount denominated in the localcurrency, make each of a series of periodic payments in the localcurrency based on a fixed interest rate and receive each of anotherseries of periodic payments in the local currency based on a floatinginterest rate and another obligation to make each of the series ofperiodic payments based on the fixed interest rate and receive each ofthe other series of periodic payments based on the floating interestrate, wherein each of the of periodic payments is funded prior theretoin local currency, exchange rates between the local and base currencyexpected to prevail in the future, and an IRS instrument comprising anobligation to, based on a notional amount denominated in the basecurrency, make each of a series of periodic payments in the basecurrency based on a fixed interest rate and receive each of anotherseries of periodic payments in the local currency based on a floatinginterest rate and another obligation to make each of the series ofperiodic payments based on the fixed interest rate and receive each ofthe other series of periodic payments based on the floating interestrate.

In one embodiment, the credit or collection of the computed variationmargin amount occurs in an account associated with the participant to orfrom which the first and second series of payments are made or received.In one embodiment, the credit of the computed variation margin amountmay reduce and/or may eliminate, e.g. net or offset, at least one of thepayments of the first or second series of periodic payments to be made.

In one embodiment, the value and the variation margin amount arecomputed and credited/collected periodically and each collected orcredited computed variation margin amount is accumulated, the system 200further including an interest processor 212, which may be implemented asa separate component or as one or more logic components, such as on anFPGA which may include a memory or reconfigurable component to storelogic and processing component to execute the stored logic, or as fourthlogic 208, e.g. computer program logic, stored in a memory 204, or othernon-transitory computer readable medium, and executable by a processor202, such as the processor 402 and memory 404 described below withrespect to FIG. 4, to cause the processor 202 to, or otherwise beoperative to, compute an amount of interest, denominated in the localcurrency, to be credited to or collected from the participant based onthe cumulative computed variation margin amounts, wherein thecomputation of the amount of interest further comprises a conversion thecumulative computed variation margin amounts from the local currencyinto the base currency based on an exchange rate between the localcurrency and the base currency at a first time, e.g. an overnight rate,computation of an amount of interest denominated in the base currencybased on the cumulative computed variation margin amounts denominated inthe base currency and a base currency market interest rate andconversion of the computed amount of interest denominated in the basecurrency to the local currency based on an exchange rate between thelocal currency and the base currency at second time, e.g. tomorrow'srate, later than the first time.

In one embodiment, the credit or collection of the amount of interestdenominated in the local currency occurs in an account associated withthe participant to or from which the first and second series of paymentsare made or received. In one embodiment, the credit of the amount ofinterest denominated in the local currency may reduce and/or eliminate,e.g. net or offset, at least one of the payments of the first or secondseries of periodic payments to be made.

In one embodiment, wherein the value and the variation margin amount arecomputed and credited/collected periodically and each collected orcredited computed variation margin amount is accumulated, the methodfurther comprising computing, by the processor, an amount of interest,denominated in the local currency, to be credited to or collected fromthe participant based on the cumulative computed variation marginamounts, wherein the computation of the amount of interest furthercomprises:

Interest Rate=MarketRate×(FX1/FX0)+((FX1/FX0)−1)/(n/360)

-   -   where: FX0=local/base currency exchange rate at time T,        -   FX1=local/base currency exchange rate at time T+1,        -   MarketRate=base currency governmental institutional rate;            and

Interest Amount (in local currency)=(Cumulative Computed VariationAmount (in local currency)×Interest Rate×No. of Days from Today to nextbusiness day)/360.

FIG. 3 depicts a flow chart showing operation of the system 200 of FIG.2. In particular FIG. 3 shows a computer implemented method forminimizing transactions undertaken by an electronic trading system of acentral counter party with respect to an interest rate swap (“IRS”)position, e.g. minimizing the transactions associates with effecting thecash flows thereof, the IRS position comprising one of a firstobligation to, based on a notional amount denominated in a localcurrency, make each of a first series of periodic payments in the localcurrency based on a fixed interest rate and receive each of a secondseries of periodic payments in the local currency based on a floatinginterest rate and a second obligation to make each of the second seriesof periodic payments and receive each of the first series of periodicpayments, wherein each of the first and second series of periodicpayments is funded prior thereto in a base currency different from thelocal currency

As described above, the system 200 may be used, as described, to analyzeall portfolios of all market participants, or a subset thereof. In oneembodiment, the system 200 is used to analyze all, or a subset of,production portfolios of all, or a subset, of the clearing members of aclearing organization, such as CME clearing.

The operation, which may be performed periodically, e.g. daily,includes: computing, by a processor 201, a value, such as a net presentvalue, denominated in the local currency, of the IRS position as afunction of a remainder of the first and second series of periodicpayments being funded in the base currency (Block 302); computing, bythe processor 202, a variation margin amount based on a differencebetween the computed value and a previously computed value of the IRSposition, the variation margin amount being denominated in the localcurrency (Block 304); and one of crediting to, or collecting from, bythe processor 202, a participant holding the IRS position the computedvariation margin amount (Block 306).

In one embodiment, the operation of the system 200 may further includereceiving, by the processor 202, from a first participant, an IRStransaction between the first participant and a second participantcomprising the first and second obligations (Block 308); converting, bythe processor 202, the first obligation into a third obligation to makeeach of the first series of periodic payments to an intermediary andreceive each of the second series of periodic payments from theintermediary (Block 310); converting, by the processor 202, the secondobligation into a fourth obligation to make each of the second series ofperiodic payments to the intermediary and receive each of the firstseries of periodic payments from the intermediary (Block 312); andwherein performance of either of the third or fourth obligations is notdependent upon performance of the other of the third or fourthobligations.

In one embodiment, the computed variation margin amount is used tofacilitate performance of either of the third or fourth obligations whenperformance of the other of the third or fourth obligations does notoccur.

In one embodiment, the local currency is pesos and the base currency isdollars. In one embodiment, the floating interest rate is based on areference interest rate comprising one of a Fed Funds rate, a LondonInterbank Offered Rate (“LIBOR”) or a Interbank Equilibrium InterestRate (“TIIE”) rate.

In one embodiment, the operation of the system 200 may further include:determining, by the processor 202, a first discounted value of aremainder of the first series of payments based on the fixed interestrate and an exchange rate between the local currency and the basecurrency expected to prevail when each of the remainder of the firstseries of payments is to be made (Block 314); and determining, by theprocessor 202, a second discounted value of a remainder of the secondseries of payments based on a value of the floating interest rate andthe exchange rate between the local currency and the base currencyexpected to prevail when each of the remainder of the second series ofpayments is to be made (Block 316).

In one embodiment, the operation of the system 200 may further includecomputing of the value of the IRS position further based on one or moreof an IRS instrument comprising an obligation to, based on a notionalamount denominated in the local currency, make each of a series ofperiodic payments in the local currency based on a fixed interest rateand receive each of another series of periodic payments in the localcurrency based on a floating interest rate and another obligation tomake each of the series of periodic payments based on the fixed interestrate and receive each of the other series of periodic payments based onthe floating interest rate, wherein each of the of periodic payments isfunded prior thereto in local currency, exchange rates between the localand base currency expected to prevail in the future, and an IRSinstrument comprising an obligation to, based on a notional amountdenominated in the base currency, make each of a series of periodicpayments in the base currency based on a fixed interest rate and receiveeach of another series of periodic payments in the local currency basedon a floating interest rate and another obligation to make each of theseries of periodic payments based on the fixed interest rate and receiveeach of the other series of periodic payments based on the floatinginterest rate.

In one embodiment, the crediting or collecting of the computed variationmargin amount occurs in an account associated with the participant to orfrom which the first and second series of payments are made or received.

In one embodiment, the crediting of the computed variation margin amountmay reduce and/or eliminate, e.g. net or offset, at least one of thepayments of the first or second series of periodic payments to be made.

In one embodiment, the system 200 operates periodically, e.g. daily, andeach collected or credited computed variation margin amount isaccumulated, the operation of the system 200 may further includecomputing, by the processor 202, an amount of interest, denominated inthe local currency, to be credited to or collected from the participantbased on the cumulative computed variation margin amounts, wherein thecomputing of the amount of interest further comprises converting thecumulative computed variation margin amounts from the local currencyinto the base currency based on an exchange rate between the localcurrency and the base currency at a first time, e.g. an overnight rate,computing an amount of interest denominated in the base currency basedon the cumulative computed variation margin amounts denominated in thebase currency and a base currency market interest rate and convertingthe computed amount of interest denominated in the base currency to thelocal currency based on an exchange rate between the local currency andthe base currency at second time, e.g. tomorrow's rate, later than thefirst time (Block 318).

In one embodiment, the crediting or collecting of the amount of interestdenominated in the local currency occurs in an account associated withthe participant to or from which the first and second series of paymentsare made or received. In one embodiment, the crediting of the amount ofinterest denominated in the local currency may reduce and/or eliminateat least one of the payments of the first or second series of periodicpayments to be made.

In one embodiment where the system 200 operates periodically, e.g.daily, and each collected or credited computed variation margin amountis accumulated, the operation of the system may further includecomputing, by the processor, an amount of interest, denominated in thelocal currency, to be credited to or collected from the participantbased on the cumulative computed variation margin amounts, wherein thecomputing of the amount of interest further comprises:

Interest Rate=MarketRate×(FX1/FX0)+((FX1/FX0)−1)/(n/360)

-   -   where: FX0=local/base currency exchange rate at time T,        -   FX1=local/base currency exchange rate at time T+1,        -   MarketRate=base currency governmental institutional rate;            and

Interest Amount (in local currency)=(Cumulative Computed VariationAmount (in local currency)×Interest Rate×No. of Days from Today to nextbusiness day)/360.

FIG. 5 shows a diagram depicting calculation of PAI according to thedisclosed embodiments, including conversion of variation margin inMexican Pesos (VM_(MXN)) being converted to US dollars at time T₀ basedon the overnight exchange rate (FX_(ON)), the computation of the PAIrate and conversion thereof back to Pesos at time T₁ based on thetomorrow night exchange rate (FX_(TN)) and the resultant computation ofPAI based thereon.

Appendix A, incorporated by reference herein, shows a further example ofthe cash flows for an exemplary IRS according to the disclosedembodiments. The example illustrates the Valuation and Cash Flows of aMXN swap before and after the Coupon payment has settled. The exampleincludes the Curve Instruments used in MXN Curve construction (describedabove) on given days of a swap, as well as an example of the PAI Ratecalculation (described above). PAI is a component of the combined MXNcash flow (PAI, Coupon(s), Variation Margin, Upfront Fee) that can movethrough CME Clearing.

-   -   1. Cleared Date 10/1/2014: This worksheet (pages 1 and 2)        illustrates the MXN swap on the day it is cleared at CME        -   a. Rows 11-12: Valuation and Cash Flows of the swap, to            include: NPV, Adjusted NPV, PAI Rate, VM and Net Cash flow            banked the next good Business Day        -   b. Rows 15-33: The PV of current and future Coupon payments            that are used to calculate the NPV of the swap        -   c. Rows 35-80; Columns A-C: Curve Instruments and Quotes for            both TIIE Forecasting and USDMXN Discounting        -   d. Rows 35-44; Columns E and F: PAI rate calculation    -   2. Coupon Date—1: This worksheet (pages 1 and 2) illustrates the        MXN swap on the business day before Coupon Payment Date        -   a. Rows 11-12: Valuation and Cash Flows of the swap, to            include: NPV, Adjusted NPV, PAI Rate and Amount, VM, PV of            Coupons and Net Cash flow banked the next good Business Day        -   b. Rows 15-33: The PV of current and future Coupon payments            that are used to calculate the NPV of the swap        -   c. Rows 35-80; Columns A-C: Curve Instruments and Quotes for            both TIIE Forecasting and USDMXN Discounting        -   d. Rows 35-44; Columns E and F: PAI rate calculation    -   3. Coupon Date 10/31/2014: This worksheet (pages 1 and 2)        illustrates the MXN swap on the Coupon Payment Date (both fixed        and float)        -   a. Rows 11-12: Valuation and Cash Flows of the swap, to            include: NPV, Adjusted NPV, PAI Rate and Amount, VM, and Net            Cash flow banked the next good Business Day        -   b. Rows 15-33: The PV of current and future Coupon payments            that are used to calculate the NPV of the swap        -   c. Rows 35-80; Columns A-C: Curve Instruments and Quotes for            both TIIE Forecasting and USDMXN Discounting        -   d. Rows 35-44; Columns E and F: PAI rate calculation

One skilled in the art will appreciate that one or more modulesdescribed herein may be implemented using, among other things, atangible computer-readable medium comprising computer-executableinstructions (e.g., executable software code). Alternatively, modulesmay be implemented as software code, firmware code, hardware, and/or acombination of the aforementioned. For example the modules may beembodied as part of an exchange 100 for financial instruments.

Referring to FIG. 4, an illustrative embodiment of a general computersystem 400 is shown. The computer system 400 can include a set ofinstructions that can be executed to cause the computer system 400 toperform any one or more of the methods or computer based functionsdisclosed herein. The computer system 400 may operate as a standalonedevice or may be connected, e.g., using a network, to other computersystems or peripheral devices. Any of the components discussed above,such as the processor 202, may be a computer system 400 or a componentin the computer system 400. The computer system 400 may implement amatch engine, margin processing, payment or clearing function on behalfof an exchange, such as the Chicago Mercantile Exchange, of which thedisclosed embodiments are a component thereof.

In a networked deployment, the computer system 400 may operate in thecapacity of a server or as a client user computer in a client-serveruser network environment, or as a peer computer system in a peer-to-peer(or distributed) network environment. The computer system 400 can alsobe implemented as or incorporated into various devices, such as apersonal computer (PC), a tablet PC, a set-top box (STB), a personaldigital assistant (PDA), a mobile device, a palmtop computer, a laptopcomputer, a desktop computer, a communications device, a wirelesstelephone, a land-line telephone, a control system, a camera, a scanner,a facsimile machine, a printer, a pager, a personal trusted device, aweb appliance, a network router, switch or bridge, or any other machinecapable of executing a set of instructions (sequential or otherwise)that specify actions to be taken by that machine. In a particularembodiment, the computer system 400 can be implemented using electronicdevices that provide voice, video or data communication. Further, whilea single computer system 400 is illustrated, the term “system” shallalso be taken to include any collection of systems or sub-systems thatindividually or jointly execute a set, or multiple sets, of instructionsto perform one or more computer functions.

As illustrated in FIG. 4, the computer system 400 may include aprocessor 402, e.g., a central processing unit (CPU), a graphicsprocessing unit (GPU), or both. The processor 402 may be a component ina variety of systems. For example, the processor 402 may be part of astandard personal computer or a workstation. The processor 402 may beone or more general processors, digital signal processors, applicationspecific integrated circuits, field programmable gate arrays, servers,networks, digital circuits, analog circuits, combinations thereof, orother now known or later developed devices for analyzing and processingdata. The processor 402 may implement a software program, such as codegenerated manually (i.e., programmed).

The computer system 400 may include a memory 404 that can communicatevia a bus 408. The memory 404 may be a main memory, a static memory, ora dynamic memory. The memory 404 may include, but is not limited tocomputer readable storage media such as various types of volatile andnon-volatile storage media, including but not limited to random accessmemory, read-only memory, programmable read-only memory, electricallyprogrammable read-only memory, electrically erasable read-only memory,flash memory, magnetic tape or disk, optical media and the like. In oneembodiment, the memory 404 includes a cache or random access memory forthe processor 402. In alternative embodiments, the memory 404 isseparate from the processor 402, such as a cache memory of a processor,the system memory, or other memory. The memory 404 may be an externalstorage device or database for storing data. Examples include a harddrive, compact disc (“CD”), digital video disc (“DVD”), memory card,memory stick, floppy disc, universal serial bus (“USB”) memory device,or any other device operative to store data. The memory 404 is operableto store instructions executable by the processor 402. The functions,acts or tasks illustrated in the figures or described herein may beperformed by the programmed processor 402 executing the instructions 412stored in the memory 404. The functions, acts or tasks are independentof the particular type of instructions set, storage media, processor orprocessing strategy and may be performed by software, hardware,integrated circuits, firm-ware, micro-code and the like, operating aloneor in combination. Likewise, processing strategies may includemultiprocessing, multitasking, parallel processing and the like.

As shown, the computer system 400 may further include a display unit414, such as a liquid crystal display (LCD), an organic light emittingdiode (OLED), a flat panel display, a solid state display, a cathode raytube (CRT), a projector, a printer or other now known or later developeddisplay device for outputting determined information. The display 414may act as an interface for the user to see the functioning of theprocessor 402, or specifically as an interface with the software storedin the memory 404 or in the drive unit 406.

Additionally, the computer system 400 may include an input device 416configured to allow a user to interact with any of the components ofsystem 400. The input device 416 may be a number pad, a keyboard, or acursor control device, such as a mouse, or a joystick, touch screendisplay, remote control or any other device operative to interact withthe system 400.

In a particular embodiment, as depicted in FIG. 4, the computer system400 may also include a disk or optical drive unit 406. The disk driveunit 406 may include a computer-readable medium 410 in which one or moresets of instructions 412, e.g. software, can be embedded. Further, theinstructions 412 may embody one or more of the methods or logic asdescribed herein. In a particular embodiment, the instructions 412 mayreside completely, or at least partially, within the memory 404 and/orwithin the processor 402 during execution by the computer system 400.The memory 404 and the processor 402 also may include computer-readablemedia as discussed above.

The present disclosure contemplates a computer-readable medium thatincludes instructions 412 or receives and executes instructions 412responsive to a propagated signal, so that a device connected to anetwork 420 can communicate voice, video, audio, images or any otherdata over the network 420. Further, the instructions 412 may betransmitted or received over the network 420 via a communicationinterface 418. The communication interface 418 may be a part of theprocessor 402 or may be a separate component. The communicationinterface 418 may be created in software or may be a physical connectionin hardware. The communication interface 418 is configured to connectwith a network 420, external media, the display 414, or any othercomponents in system 400, or combinations thereof. The connection withthe network 420 may be a physical connection, such as a wired Ethernetconnection or may be established wirelessly as discussed below.Likewise, the additional connections with other components of the system400 may be physical connections or may be established wireles sly.

The network 420 may include wired networks, wireless networks, orcombinations thereof. The wireless network may be a cellular telephonenetwork, an 802.11, 802.16, 802.20, or WiMax network. Further, thenetwork 420 may be a public network, such as the Internet, a privatenetwork, such as an intranet, or combinations thereof, and may utilize avariety of networking protocols now available or later developedincluding, but not limited to TCP/IP based networking protocols.

Embodiments of the subject matter and the functional operationsdescribed in this specification can be implemented in digital electroniccircuitry, or in computer software, firmware, or hardware, including thestructures disclosed in this specification and their structuralequivalents, or in combinations of one or more of them. Embodiments ofthe subject matter described in this specification can be implemented asone or more computer program products, i.e., one or more modules ofcomputer program instructions encoded on a computer readable medium forexecution by, or to control the operation of, data processing apparatus.While the computer-readable medium is shown to be a single medium, theterm “computer-readable medium” includes a single medium or multiplemedia, such as a centralized or distributed database, and/or associatedcaches and servers that store one or more sets of instructions. The term“computer-readable medium” shall also include any medium that is capableof storing, encoding or carrying a set of instructions for execution bya processor or that cause a computer system to perform any one or moreof the methods or operations disclosed herein. The computer readablemedium can be a machine-readable storage device, a machine-readablestorage substrate, a memory device, or a combination of one or more ofthem. The term “data processing apparatus” encompasses all apparatus,devices, and machines for processing data, including by way of example aprogrammable processor, a computer, or multiple processors or computers.The apparatus can include, in addition to hardware, code that creates anexecution environment for the computer program in question, e.g., codethat constitutes processor firmware, a protocol stack, a databasemanagement system, an operating system, or a combination of one or moreof them.

In a particular non-limiting, exemplary embodiment, thecomputer-readable medium can include a solid-state memory such as amemory card or other package that houses one or more non-volatileread-only memories. Further, the computer-readable medium can be arandom access memory or other volatile re-writable memory. Additionally,the computer-readable medium can include a magneto-optical or opticalmedium, such as a disk or tapes or other storage device to capturecarrier wave signals such as a signal communicated over a transmissionmedium. A digital file attachment to an e-mail or other self-containedinformation archive or set of archives may be considered a distributionmedium that is a tangible storage medium. Accordingly, the disclosure isconsidered to include any one or more of a computer-readable medium or adistribution medium and other equivalents and successor media, in whichdata or instructions may be stored.

In an alternative embodiment, dedicated hardware implementations, suchas application specific integrated circuits, programmable logic arraysand other hardware devices, can be constructed to implement one or moreof the methods described herein. Applications that may include theapparatus and systems of various embodiments can broadly include avariety of electronic and computer systems. One or more embodimentsdescribed herein may implement functions using two or more specificinterconnected hardware modules or devices with related control and datasignals that can be communicated between and through the modules, or asportions of an application-specific integrated circuit. Accordingly, thepresent system encompasses software, firmware, and hardwareimplementations.

In accordance with various embodiments of the present disclosure, themethods described herein may be implemented by software programsexecutable by a computer system. Further, in an exemplary, non-limitedembodiment, implementations can include distributed processing,component/object distributed processing, and parallel processing.Alternatively, virtual computer system processing can be constructed toimplement one or more of the methods or functionality as describedherein.

Although the present specification describes components and functionsthat may be implemented in particular embodiments with reference toparticular standards and protocols, the invention is not limited to suchstandards and protocols. For example, standards for Internet and otherpacket switched network transmission (e.g., TCP/IP, UDP/IP, HTML, HTTP,HTTPS) represent examples of the state of the art. Such standards areperiodically superseded by faster or more efficient equivalents havingessentially the same functions. Accordingly, replacement standards andprotocols having the same or similar functions as those disclosed hereinare considered equivalents thereof.

A computer program (also known as a program, software, softwareapplication, script, or code) can be written in any form of programminglanguage, including compiled or interpreted languages, and it can bedeployed in any form, including as a standalone program or as a module,component, subroutine, or other unit suitable for use in a computingenvironment. A computer program does not necessarily correspond to afile in a file system. A program can be stored in a portion of a filethat holds other programs or data (e.g., one or more scripts stored in amarkup language document), in a single file dedicated to the program inquestion, or in multiple coordinated files (e.g., files that store oneor more modules, sub programs, or portions of code). A computer programcan be deployed to be executed on one computer or on multiple computersthat are located at one site or distributed across multiple sites andinterconnected by a communication network.

The processes and logic flows described in this specification can beperformed by one or more programmable processors executing one or morecomputer programs to perform functions by operating on input data andgenerating output. The processes and logic flows can also be performedby, and apparatus can also be implemented as, special purpose logiccircuitry, e.g., an FPGA (field programmable gate array) or an ASIC(application specific integrated circuit).

Processors suitable for the execution of a computer program include, byway of example, both general and special purpose microprocessors, andanyone or more processors of any kind of digital computer. Generally, aprocessor will receive instructions and data from a read only memory ora random access memory or both. The essential elements of a computer area processor for performing instructions and one or more memory devicesfor storing instructions and data. Generally, a computer will alsoinclude, or be operatively coupled to receive data from or transfer datato, or both, one or more mass storage devices for storing data, e.g.,magnetic, magneto optical disks, or optical disks. However, a computerneed not have such devices. Moreover, a computer can be embedded inanother device, e.g., a mobile telephone, a personal digital assistant(PDA), a mobile audio player, a Global Positioning System (GPS)receiver, to name just a few. Computer readable media suitable forstoring computer program instructions and data include all forms ofnon-volatile memory, media and memory devices, including by way ofexample semiconductor memory devices, e.g., EPROM, EEPROM, and flashmemory devices; magnetic disks, e.g., internal hard disks or removabledisks; magneto optical disks; and CD ROM and DVD-ROM disks. Theprocessor and the memory can be supplemented by, or incorporated in,special purpose logic circuitry.

To provide for interaction with a user, embodiments of the subjectmatter described in this specification can be implemented on a devicehaving a display, e.g., a CRT (cathode ray tube) or LCD (liquid crystaldisplay) monitor, for displaying information to the user and a keyboardand a pointing device, e.g., a mouse or a trackball, by which the usercan provide input to the computer. Other kinds of devices can be used toprovide for interaction with a user as well; for example, feedbackprovided to the user can be any form of sensory feedback, e.g., visualfeedback, auditory feedback, or tactile feedback; and input from theuser can be received in any form, including acoustic, speech, or tactileinput.

Embodiments of the subject matter described in this specification can beimplemented in a computing system that includes a back end component,e.g., as a data server, or that includes a middleware component, e.g.,an application server, or that includes a front end component, e.g., aclient computer having a graphical user interface or a Web browserthrough which a user can interact with an implementation of the subjectmatter described in this specification, or any combination of one ormore such back end, middleware, or front end components. The componentsof the system can be interconnected by any form or medium of digitaldata communication, e.g., a communication network. Examples ofcommunication networks include a local area network (“LAN”) and a widearea network (“WAN”), e.g., the Internet.

The computing system can include clients and servers. A client andserver are generally remote from each other and typically interactthrough a communication network. The relationship of client and serverarises by virtue of computer programs running on the respectivecomputers and having a client-server relationship to each other.

The illustrations of the embodiments described herein are intended toprovide a general understanding of the structure of the variousembodiments. The illustrations are not intended to serve as a completedescription of all of the elements and features of apparatus and systemsthat utilize the structures or methods described herein. Many otherembodiments may be apparent to those of skill in the art upon reviewingthe disclosure. Other embodiments may be utilized and derived from thedisclosure, such that structural and logical substitutions and changesmay be made without departing from the scope of the disclosure.Additionally, the illustrations are merely representational and may notbe drawn to scale. Certain proportions within the illustrations may beexaggerated, while other proportions may be minimized. Accordingly, thedisclosure and the figures are to be regarded as illustrative ratherthan restrictive.

While this specification contains many specifics, these should not beconstrued as limitations on the scope of the invention or of what may beclaimed, but rather as descriptions of features specific to particularembodiments of the invention. Certain features that are described inthis specification in the context of separate embodiments can also beimplemented in combination in a single embodiment. Conversely, variousfeatures that are described in the context of a single embodiment canalso be implemented in multiple embodiments separately or in anysuitable sub-combination. Moreover, although features may be describedabove as acting in certain combinations and even initially claimed assuch, one or more features from a claimed combination can in some casesbe excised from the combination, and the claimed combination may bedirected to a sub-combination or variation of a sub-combination.

Similarly, while operations are depicted in the drawings and describedherein in a particular order, this should not be understood as requiringthat such operations be performed in the particular order shown or insequential order, or that all illustrated operations be performed, toachieve desirable results. In certain circumstances, multitasking andparallel processing may be advantageous. Moreover, the separation ofvarious system components in the embodiments described above should notbe understood as requiring such separation in all embodiments, and itshould be understood that the described program components and systemscan generally be integrated together in a single software product orpackaged into multiple software products.

One or more embodiments of the disclosure may be referred to herein,individually and/or collectively, by the term “invention” merely forconvenience and without intending to voluntarily limit the scope of thisapplication to any particular invention or inventive concept. Moreover,although specific embodiments have been illustrated and describedherein, it should be appreciated that any subsequent arrangementdesigned to achieve the same or similar purpose may be substituted forthe specific embodiments shown. This disclosure is intended to cover anyand all subsequent adaptations or variations of various embodiments.Combinations of the above embodiments, and other embodiments notspecifically described herein, will be apparent to those of skill in theart upon reviewing the description.

The Abstract of the Disclosure is provided to comply with 37 C.F.R. §1.72(b) and is submitted with the understanding that it will not be usedto interpret or limit the scope or meaning of the claims. In addition,in the foregoing Detailed Description, various features may be groupedtogether or described in a single embodiment for the purpose ofstreamlining the disclosure. This disclosure is not to be interpreted asreflecting an intention that the claimed embodiments require morefeatures than are expressly recited in each claim. Rather, as thefollowing claims reflect, inventive subject matter may be directed toless than all of the features of any of the disclosed embodiments. Thus,the following claims are incorporated into the Detailed Description,with each claim standing on its own as defining separately claimedsubject matter.

It is therefore intended that the foregoing detailed description beregarded as illustrative rather than limiting, and that it be understoodthat it is the following claims, including all equivalents, that areintended to define the spirit and scope of this invention.

What is claimed is:
 1. A computer implemented method comprising:receiving, by a processor of an electronic transaction processingsystem, data indicative of an electronic financial transaction betweenfirst and second participants comprising a first obligation of the firstparticipant to, over a period of time, periodically make a first paymentin a first currency based on a first rate to the second participant andperiodically receive from the second participant a second payment in thefirst currency based on a second rate different from the first rate anda second obligation of the second participant to, over the period oftime, periodically make the second payment and periodically receive fromthe first participant the first payment, wherein each of theperiodically made first and second payments is funded prior thereto in asecond currency related to the first currency via a conversion rate;converting, by the processor, the first obligation into an electronictransaction comprising a third obligation of the first participant toperiodically make the first payment to the electronic transactionprocessing system and periodically receive the second payment from theelectronic transaction processing system; converting, by the processor,the second obligation into an electronic transaction comprising a fourthobligation of the second participant to periodically make the secondpayment to the electronic transaction processing system and periodicallyreceive the first payment from the electronic transaction processingsystem, wherein, subsequent to the converting, performance of theelectronic transaction comprising either of the third or fourthobligations is not dependent upon performance of the other of theelectronic transactions comprising the third or fourth obligations;computing, by the processor, a value, denominated in the first currency,of the financial transaction as a function of a remainder of theperiodically made first and second payments being funded in the secondcurrency; computing, by the processor, a variation margin amount basedon a difference between the computed value and a previously computedvalue of the financial transaction, the variation margin amount beingdenominated in the first currency; and one of crediting to, orcollecting from, by the processor, one or both of the first and secondparticipants the computed variation margin amount; and wherein thecrediting or collecting of the computed variation margin amount at leastreduces one of the periodically made first or second payments yet to bemade, and further wherein a payment that is completely offset iseliminated.
 2. The computer implemented method of claim 1, wherein thecomputed variation margin amount is used to facilitate performance ofeither of the third or fourth obligations when performance of the otherof the third or fourth obligations does not occur.
 3. The computerimplemented method of claim 1, wherein the first currency is pesos andthe second currency is dollars.
 4. The computer implemented method ofclaim 1, wherein the first rate is a fixed interest rate and the secondrate is a floating interest rate.
 5. The computer implemented method ofclaim 1, wherein the computing of the value, the computing of thevariation margin amount, and the one of crediting to, or collectingfrom, the computed variation amount are performed periodically.
 6. Thecomputer implemented method of claim 1, wherein the financialtransaction comprises an interest rate swap.
 7. The computer implementedmethod of claim 1, wherein the conversion rate varies over time and thecomputing of the value of the financial transaction further comprises:determining, by the processor, a first discounted value of a remainderof the periodically made first payments based on the first rate and theconversion rate expected to prevail when each of the remainder of theperiodically made first payments is to be made; and determining, by theprocessor, a second discounted value of a remainder of the periodicallymade second payments based on a value of the second rate and theconversion expected to prevail when each of the remainder of theperiodically made second payments is to be made.
 8. The computerimplemented method of claim 1, wherein the conversion rate varies overtime and the method is performed periodically and each collected orcredited computed variation margin amount is accumulated, the methodfurther comprising computing, by the processor, an amount of interest,denominated in the first currency, to be credited to or collected fromthe participant based on the cumulative computed variation marginamounts, wherein the computing of the amount of interest furthercomprises converting the cumulative computed variation margin amountsfrom the first currency into the second currency based on the conversionrate at a first time, computing an amount of interest denominated in thesecond currency based on the cumulative computed variation marginamounts denominated in the second currency and a second currency marketinterest rate and converting the computed amount of interest denominatedin the second currency to the first currency based on the conversionrate at second time later than the first time.
 9. The computerimplemented method of claim 8, wherein when the crediting of the amountof interest denominated in the first currency reduces or eliminates oneof the periodically made first or second payments yet to be made. 10.The computer implemented method of claim 1, wherein the computing of thevalue, the computing of the variation margin amount, and the one ofcrediting to, or collecting from, the computed variation amount areperformed periodically and each collected or credited computed variationmargin amount is accumulated, the method further comprising computing,by the processor, an amount of interest, denominated in the firstcurrency, to be credited to or collected from the participant based onthe cumulative computed variation margin amounts, wherein the computingof the amount of interest further comprises:Interest Rate=MarketRate×(FX ₁ /FX ₀)+((FX ₁ /FX ₀)−1)/(n/360) where:FX₀=conversion rate at time T, FX₁=conversion rate at time T+1,MarketRate=second currency governmental institutional rate; andInterest Amount (in first currency)=(Cumulative Computed VariationAmount (in first currency)×Interest Rate×No. of Days from Today to nextbusiness day)/360.
 11. A system comprising: first logic stored in amemory and executable by a processor coupled with the memory to causethe processor to receive data indicative of an electronic financialtransaction between first and second participants comprising a firstobligation of the first participant to, over a period of time,periodically make a first payment in a first currency based on a firstrate to the second participant and periodically receive from the secondparticipant a second payment in the first currency based on a secondrate different from the first rate and a second obligation of the secondparticipant to, over the period of time, periodically make the secondpayment and periodically receive from the first participant the firstpayment, wherein each of the periodically made first and second paymentsis funded prior thereto in a second currency related to the firstcurrency via a conversion rate, convert the first obligation into anelectronic transaction comprising a third obligation of the firstparticipant to periodically make the first payment to the electronictransaction processing system and periodically receive the secondpayment from the electronic transaction processing system, and convertthe second obligation into an electronic transaction comprising a fourthobligation of the second participant to periodically make the secondpayment to the electronic transaction processing system and periodicallyreceive the first payment from the electronic transaction processingsystem, wherein, subsequent to the converting, performance of theelectronic transaction comprising either of the third or fourthobligations is not dependent upon performance of the other of theelectronic transactions comprising the third or fourth obligations;second logic stored in the memory and executable by the processor tocause the processor to compute a value, denominated in the firstcurrency, of the financial transaction as a function of a remainder ofthe periodically made first and second payments being funded in thesecond currency; third logic stored in the memory and executable by theprocessor to cause the processor to compute a variation margin amountbased on a difference between the computed value and a previouslycomputed value of the financial transaction, the variation margin amountbeing denominated in the first currency; and fourth logic stored in thememory and executable by the processor to cause the processor to one ofcredit to, or collect from, by the processor, one or both of the firstand second participants the computed variation margin amount; andwherein the crediting or collecting of the computed variation marginamount at least reduces one of the periodically made first or secondpayments yet to be made, and further wherein a payment that iscompletely offset is eliminated.
 12. A system comprising: a transactionprocessor operative to receive data indicative of an electronicfinancial transaction between first and second participants comprising afirst obligation of the first participant to, over a period of time,periodically make a first payment in a first currency based on a firstrate to the second participant and periodically receive from the secondparticipant a second payment in the first currency based on a secondrate different from the first rate and a second obligation of the secondparticipant to, over the period of time, periodically make the secondpayment and periodically receive from the first participant the firstpayment, wherein each of the periodically made first and second paymentsis funded prior thereto in a second currency related to the firstcurrency via a conversion rate, convert the first obligation into anelectronic transaction comprising a third obligation of the firstparticipant to periodically make the first payment to the electronictransaction processing system and periodically receive the secondpayment from the electronic transaction processing system, and convertthe second obligation into an electronic transaction comprising a fourthobligation of the second participant to periodically make the secondpayment to the electronic transaction processing system and periodicallyreceive the first payment from the electronic transaction processingsystem, wherein, subsequent to the converting, performance of theelectronic transaction comprising either of the third or fourthobligations is not dependent upon performance of the other of theelectronic transactions comprising the third or fourth obligations; avaluation processor coupled with the transaction processor and operativeto compute a value, denominated in the first currency, of the financialtransaction as a function of a remainder of the periodically made firstand second payments being funded in the second currency; a marginprocessor coupled with the valuation processor and operative to computea variation margin amount based on a difference between the computedvalue and a previously computed value of the financial transaction, thevariation margin amount being denominated in the first currency; andwherein the margin processor is further operative to one of credit to,or collect from, by the processor, one or both of the first and secondparticipants the computed variation margin amount; and wherein thecrediting or collecting of the computed variation margin amount at leastreduces one of the periodically made first or second payments yet to bemade, and further wherein a payment that is completely offset iseliminated.
 13. The system of claim 12, wherein the computed variationmargin amount is used to facilitate performance of either of the thirdor fourth obligations when performance of the other of the third orfourth obligations does not occur.
 14. The system of claim 12, whereinthe first currency is pesos and the second currency is dollars.
 15. Thesystem of claim 12, wherein the first rate is a fixed interest rate andthe second rate is a floating interest rate.
 16. The system of claim 12,wherein the value and the variation margin amount are computed andcredited/collected periodically.
 17. The system of claim 12, wherein thefinancial transaction comprises an interest rate swap.
 18. The system ofclaim 15, wherein the value comprises a net present value of thefinancial transaction.
 19. The system of claim 12, wherein theconversion rate varies over tome and the valuation processor is furtheroperative to determine a first discounted value of a remainder of theperiodically made first payments based on the first rate and theconversion rate expected to prevail when each of the remainder of theperiodically made first payments is to be made, and determine a seconddiscounted value of a remainder of the periodically made second paymentsbased on a value of the second rate and the conversion rate expected toprevail when each of the remainder of the periodically made secondpayments is to be made.
 20. The system of claim 12, wherein theconversion rate varies over time and the value and the variation marginamount are computed and credited/collected periodically and eachcollected or credited computed variation margin amount is accumulated,the system further comprising an interest processor operative to computean amount of interest, denominated in the first currency, to be creditedto or collected from the participant based on the cumulative computedvariation margin amounts, wherein the computation of the amount ofinterest further comprises a conversion the cumulative computedvariation margin amounts from the first currency into the secondcurrency based on the conversion rate at a first time, computation of anamount of interest denominated in the second currency based on thecumulative computed variation margin amounts denominated in the secondcurrency and a second currency market interest rate and conversion ofthe computed amount of interest denominated in the second currency tothe first currency based on the conversion rate at a second time laterthan the first time.
 21. The system of claim 20, wherein when the creditof the amount of interest denominated in the first currency reduces oreliminates one of the periodically made first or second payments yet tobe made.
 22. The system of claim 15 wherein the value and the variationmargin amount are computed and credited/collected periodically and eachcollected or credited computed variation margin amount is accumulated,the margin processor further operative to compute an amount of interest,denominated in the first currency, to be credited to or collected fromthe participant based on the cumulative computed variation marginamounts, wherein the computation of the amount of interest furthercomprises:Interest Rate=MarketRate×(FX ₁ /FX ₀)+((FX ₁ /FX ₀)−1)/(n/360) where:FX₀=conversion rate at time T, FX₁=conversion rate at time T+1,MarketRate=second currency governmental institutional rate; andInterest Amount (in first currency)=(Cumulative Computed VariationAmount (in first currency)×Interest Rate×No. of Days from Today to nextbusiness day)/360.
 23. A system comprising: means for receiving dataindicative of an electronic financial transaction between first andsecond participants comprising a first obligation of the firstparticipant to, over a period of time, periodically make a first paymentin a first currency based on a first rate to the second participant andperiodically receive from the second participant a second payment in thefirst currency based on a second rate different from the first rate anda second obligation of the second participant to, over the period oftime, periodically make the second payment and periodically receive fromthe first participant the first payment, wherein each of theperiodically made first and second payments is funded prior thereto in asecond currency related to the first currency via a conversion rate;means for converting the first obligation into an electronic transactioncomprising a third obligation of the first participant to periodicallymake the first payment to the electronic transaction processing systemand periodically receive the second payment from the electronictransaction processing system; means for converting the secondobligation into an electronic transaction comprising a fourth obligationof the second participant to periodically make the second payment to theelectronic transaction processing system and periodically receive thefirst payment from the electronic transaction processing system,wherein, subsequent to the converting, performance of the electronictransaction comprising either of the third or fourth obligations is notdependent upon performance of the other of the electronic transactionscomprising the third or fourth obligations; means for computing a value,denominated in the first currency, of the financial transaction as afunction of a remainder of the periodically made first and secondpayments being funded in the second currency; means for computing avariation margin amount based on a difference between the computed valueand a previously computed value of the financial transaction, thevariation margin amount being denominated in the first currency; andmeans for one of crediting to, or collecting from one or both of thefirst and second participants the computed variation margin amount; andwherein the crediting or collecting of the computed variation marginamount at least reduces one of the periodically made first or secondpayments yet to be made, and further wherein a payment that iscompletely offset is eliminated.